The Uniform Commercial Code, or UCC, is a set of legal rules created by the National Conference of Commissioners on Uniform State Laws and the American Law Institute that help define and guide commercial activity, including financial contracts and transactions. Among other things, the UCC helps define the risk of loss in sale transactions.

Risk of Loss

With any commercial transaction, there is risk of loss. It’s possible that either the buyer or seller in a transaction could bear the risk of loss, but the UCC helps to define which stages of the transaction present risk and which party bears this risk. For example, if you are a commercial farmer and sell a shipment of apples to a grocer, there is a risk of loss from the time the contract is made until after the product is delivered. Depending on the stage of the transaction, this risk could be held by you, the farmer or by the grocer.

Transfer of Title

According to the UCC, a sale is defined as a “shift in title.” This means that the ownership of goods has been legally transferred from the seller to the buyer. This transfer of title plays a large role in the risk of loss shared by the parties of the transaction throughout the sale. Typically, the party who currently holds the title to the goods bears the risk of loss for those goods. So between a typical buyer and seller, the seller retains the risk of loss until the title is transferred successfully to the buyer, who then bears the risk.

Risk of Loss for Sellers

According to the UCC, there are several types of transactions (or stages within transactions) wherein the seller bears the risk of loss. Sellers bear risk when they are holding goods for a buyer, up until the buyer actually takes possession of the goods. The seller also bears the risk of loss on transactions that are “sale on approval,” in which a buyer must contractually accept the delivered goods before the sale is final. If goods are held by a third party, also called a bailee, the risk of loss is on the seller until the bailee receives a document of title from the buyer and releases the goods.

Risk of Loss for Buyers

The UCC also outlines several transaction types and stages wherein the buyer assumes the risk of loss. Among these are sales and returns, wherein a buyer has a conditional right to return the purchased product. Until the product is returned (within the contracted period), the buyer retains the risk of loss. Additionally, if a buyer breaches on a sales contract, the UCC states that the risk of loss is immediately shifted from the seller to the buyer.

About the Author

Kristen Radford Price began writing in 2005 for her campus newspaper. She has served as a feature writer for the life-and-style section of the "Daily Herald," a contributor to "Utah Valley Weekly," an editor for a small publishing house and now as director of communications for an Internet company. Radford has a Bachelor of Arts in journalism from Brigham Young University.